SEC Proposes Amending Corporate Disclosure Rules

The U.S. Securities and Exchange Commission is proposing changes to rules governing how companies disclose financial information—the latest move by the regulator to give executives more flexibility in what they share with investors.

Source: WSJ | Published on February 4, 2020

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The proposal, which has been released for public comment over the next 60 days, reflects the regulator’s general shift from strict guidance toward principles-based disclosures that aim to simplify information for companies and investors.

The amendments propose alterations to the SEC’s Regulation S-K, which serves as the foundation of disclosure requirements for U.S. public companies.

The SEC proposed other changes to Regulation S-K in August that would make disclosures on corporate legal proceedings and risk factors more principles-based. The regulator has not yet voted on that proposal.

Under the new proposal, released Thursday, companies would no longer be required to provide the previous five years of selected annual financial data or the previous two years of selected quarterly financial data to the SEC.

The proposal in some ways attempts to roll back regulations the SEC imposed after the Sarbanes-Oxley Act of 2002, which Congress passed with the aim of strengthening corporate governance in the aftermath of several high-profile accounting-fraud scandals.

For example, companies are currently required to disclose contractual obligations in the form of a table. Under the proposal, tabular disclosure would no longer be required.

In another requirement dating back to the early 2000s, companies must carve out a separate section in their disclosures to discuss off-balance sheet arrangements that have or are reasonably likely to have an effect on their financial condition. The new SEC proposal would replace that requirement with guidelines prompting companies to instead discuss off-balance sheet arrangements in the context of managing the overall business.

Separately, the SEC is providing guidance for companies’ disclosure of information on their key performance indicators and metrics in the management discussion and analysis section of financial statements.

“The improved disclosures would allow investors to make better capital allocation decisions, while reducing compliance burdens and costs without in any way adversely affecting investor protection,” SEC Chairman Jay Clayton said in a statement.

Two SEC commissioners publicly commented on the proposal’s omission of any mention of disclosures on environmental, social and governance issues. The SEC doesn’t require companies to make ESG disclosures despite increased requests from investors that it do so.

Commissioner Allison Herren Lee criticized the proposal, saying it was most notable for what it did not do—address the need for standardized disclosure on ESG issues.

Commissioner Hester Peirce, who was more supportive of the proposal, said in a statement she is not ready to mandate that all companies determine the materiality of ESG disclosures.

Mr. Clayton has said it is unclear whether rulemaking on ESG is necessary and the SEC continues to discuss the issue with investors.

Sandy Peters, senior head of financial reporting policy at the CFA Institute, a nonprofit association of financial analysts, said this week she doesn’t expect the SEC to require ESG disclosures unless investors start believing they have been misled.